Core inflation in Latvia likely to return to 2.5% at end-2013

Core inflation in the first half of the year 2013 will be low, but in the latter part of the year and in 2014 it could return to the normal growth of about 2.5%, according to Latvia's Convergence Program for 2013-2016 prepared by the Finance Ministry, reports LETA/Nozare.lv.

Price dynamics in Latvia this year
will be determined by the comparatively weak economic development in the
European Union, which will also result in low inflation. The report says that
there are no grounds to expect changes in food and energy price dynamics in
2013.

According to the program, the
number of residents employed in the national economy will increase 1.4% in
2014, and it will continue to increase by an average 1.3% annually in the three
subsequent years. Therefore, gross domestic product growth, just as in the past
years, will be rather ensured by increasing productivity, not the number of
employees.

According to the macroeconomic
development scenario, Latvian economy will continue to be one of the fastest
growing economies in the EU in the medium term. Taking into account the
continuing recession in the eurozone and the fact that last year's record
harvest will not be repeated this year, GDP quarterly growth pace will continue
to reduce in the short term, and GDP quarterly growth will return to about 1%
from the latter part of the year. GDP growth forecast for 2013 and for the
medium-term is 4%, says the report.

With the employment gradually
increasing, the unemployment rate will reduce in the medium-term, partly due to
an expected reduction in the number of economically-active residents. This
year, unemployment is to decrease to 12.6% of economically-active residents,
and it will further decrease to under 10% in 2015. At the same time, the
proportion of long-term unemployed will remain high, which means discrepancies
in supply and demand on the labor market, and suggests structural unemployment
risks, which may result in shortage of labor in certain professions and sectors
in the future.

The growth in productivity over the
past two years will remain as high until 2016. In the past four years,
productivity has been growing faster than the actual remuneration, thereby
increasing Latvia's competitiveness on external markets. It is expected that
wage growth will not exceed productivity growth in the coming years too.

The Convergence Program notes
several negative and positive risks.

One of the negative risks is that
economic recovery in the euro area could be slower than anticipated, affecting
Latvia's overall growth pace.

The unconvincing economic recovery
in the eurozone and reducing economic growth pace in Latvia may also affect
businessmen and consumers' confidence and therefore reduce the growth in demand
in Latvia – households could choose to rather save money than spend it, whereas
companies could invest less money than now.

The other negative risks include
increasing labor costs, reducing number of economically-active residents,
differences between the supply and demand on the labor market. This, in turn,
may affect companies' workforces, growth and competitiveness of Latvia's
exports, and investments, says the report.

Latvian banking sector's close ties
with the Scandinavian banks is also seen as a risk. Should the eurozone
countries' problems grow worse, Latvian companies' ability to borrow from banks
could be affected, or bank loans could become more expensive.

The report also mentions such risks
as the anticipated increase in electricity rates in Latvia, possible risks to
residents' purchasing capacity, faster price growth than anticipated.

Whereas the main positive risks to
the economic development of Latvia depend on avoiding the negative risks.
Solving the eurozone debt crisis could have a better effect than currently
expected, and the global economy development may be faster than anticipated.
International lenders and rating agencies' assessment of the Latvian national
economy confirms that the business environment in Latvia continues to improve,
which may prompt influx of investment.

Latvia's accession to the euro area
in 2014 is an important positive risk to the attraction of new investors in the
medium term. Reducing currency risks may also result in a faster growth in
exports. Likewise, absorption of EU funds and companies' savings have been a
positive risk to the growth of investments in the Latvian economy.

The report also mentions such
positive risks as banks' liquidity ratio and preparedness to lend to companies,
strong stimuli to consumption growth, including the increasing wages and
reducing tax burden, state support for re-emigration, mobility and retraining,
which may accelerate re-emigration to Latvia, and if energy and commodity
prices are lower than projected, inflation in Latvia will be lower than
anticipated.

The Convergence Program for
2013-2016 is a medium-term policy document that describes Latvia's fiscal
policy in 2013-2016. The Convergence Program is aimed at pursuing rigid and
sustainable fiscal policy and ensuring the macroeconomic stability. The report
describes the economic situation in Latvia, the effect of structural reforms on
the national economy and public finances, the overall government budget and
debt, macroeconomic scenario risks, comparison to the Latvian Convergence
Program for 2012-2015 and recommendations by the EU Council, a comparison of
the general government budget balance and debt projections, quality and
sustainability of the public finances.

Circular economy for modern growth: EU and the Baltics EU’s circular economy plans are aimed at efficient use of natural resources and raw materials, waste disposal, while fostering energy savings and reducing CO2. Adequate actions in the Baltic States would contribute to “closing the loop” of product lifecycles through greater recycling and re-use, while bringing benefits to environment, business and economic growth.